Earnings Call: Q2 2013

Aug 9, 2012

Good afternoon. My name is Delina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Navidea Corporation Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. I will now turn the call over to our host, Mr. Rob Tangor. Sir, you may begin your conference. Thank you. Good afternoon and welcome to NVIDIA's conference call on Q2 of fiscal 2013 results. With me on the call today from NVIDIA are Jensen Huang, President and Chief Executive Officer and Karen Burns, Interim Chief Financial Officer. After our prepared remarks, we will open up the call to a question and answer session. Before we begin, I'd like to remind you that today's call is being webcast live on NVIDIA's Investor Relations website and is also being recorded. A replay of the conference call will be available via telephone until August 16, 2012, and the webcast will be available for replay until our conference call to discuss our financial results for our Q3 of fiscal 2013. The content of today's conference call is NVIDIA's property and cannot be reproduced or transcribed without our prior written consent. During the course of this call, we may make forward looking statements based on current expectations. These forward looking statements are subject to a number of significant risks and uncertainties and our actual results may differ materially. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release, our Form 10 Q for the fiscal quarter ended April 29, 2012, and the reports we may file from time to time on Form 8 ks filed with the Securities and Exchange Commission. All our statements are made as of today, August 9, 2012 based on information available to us as of today and except as required by law, we assume no obligation to update any such statements. Unless otherwise noted, all references to market research and market share numbers throughout the call come from Mercury Research or John Pette Research. During this call, we will discuss non GAAP financial measures. You can find a reconciliation of these non GAAP financial measures to GAAP financial measures in our financial release, which is posted on our website. With that, let's begin. We're pleased to report a better than expected quarter, driven by Kepler, the best GPU we have ever built and Tegra 3, the world's 1st quad core mobile processor. Kepler is the most capable as well as most energy efficient GPU architecture we've ever created. Kepler drove a record quarter for our notebook business based on the beginning of market share gains. And we believe that due to the later timing of Ivy Bridge rollout this year, the lion's share of market share gains are still to come in the Q3. Our desktop GPU business was also up this quarter from strong GeForce GTX sales. Up to now due to supply limitations, we have only been able to address the enthusiast market. Finally, we're able to bring Kepler to the core PC gaming market. From our data of the global installed base, roughly 80% of gamers have graphics cards that are below the recommended specifications of the wave of new games coming out in the second half of the year. Kepler is the perfect upgrade for the millions of PC gamers around the world. Kepler will soon be flowing into our professional businesses. Our professional solutions business was down slightly in the Q2 from the previous quarter. But with the recent introduction of the Tesla K10 and K20 GPU for high performance computing, GPU for high performance computing and we anticipate growth again for Tesla starting next quarter as it begins to ship. Tegra had a record quarter. As you in the press have obviously noted, Tegra 3 is showing up in some of the world's most exciting mobile devices and the business is ramping. Google recently announced and launched to tremendous response the Nexus 7, the world's first 199 quad core 7 inches tablet. The Nexus 7 runs the newest version of Android 4.1 Jellybean. It is the perfect device for the hundreds of millions of consumers who use Android phones and would like to enjoy the same content on a larger display. Microsoft this quarter unveiled its own Windows RT powered tablet called Surface, again driven by a Tegra processor. A groundbreaking mobile device powered by Tegra 3 was TEGRA Processors also began shipping in automobiles this quarter, powering Tesla Motors Model S 17 inches touchscreen infotainment and navigation system, the largest ever in a passenger car. TEGR also powers its all digital instrument cluster. For drivers, the system provides larger more readable maps and a beautifully rendered instrument cluster that can be personalized from the multifunction steering wheel. With that, let me hand the call over to Karen. Thanks, Rob. Revenue of $1,040,000,000 increased 13 percent quarter over quarter, hitting the high end of our outlook. Driving this strong demand for our desktop driving this were strong demand for our desktop GTX GPUs and record quarters for our notebook and Tegra products. GAAP gross margin for the quarter was 51.8 percent and non GAAP was 52%, representing an increase from Q1 of 1.7percent1.6 percentage points respectively. Improved 28 nanometer supply enabled us to ship more of our Kepler GPUs in the high end segments. GAAP OpEx was 401 point $1,000,000 and non GAAP was $342,500,000 both much better than our outlook. GAAP OpEx was up on our announced charitable contribution of $25,000,000 Its net present value of $20,100,000 was charged to OpEx as a non recurring item. Non GAAP, which excluded this charge, was down from the prior quarter, benefiting from lower discretionary expenses. These results contributed to GAAP net income of 100 and $19,000,000 a 97% increase over the prior quarter, equivalent to $0.19 per diluted share, which was up 90%. Non GAAP net income was $170,400,000 a 75% increase from Q1, equivalent to $0.27 per diluted share, a 69% increase. The strong demand for our desktop performance and enthusiast products and growing notebook shares in the as the industry continues to move to the Ivy Bridge platform. Our professional business was down 8% sequentially, Our consumer business was up 36% on the strength of our TEGRA business. While we continue to be supply constrained, our GAAP outlook for the Q3 is as follows: revenue of $1,150,000,000 to 1,250,000,000 percent, flat from the Q2. OpEx of approximately $390,000,000 We expect our tax rate for the quarter to be 20% plus or minus one percentage point. For non GAAP, we expect the following differences from our GAAP outlook. Gross margin of 52%, flat from Q2. OpEx of approximately 3 $50,000,000 which excludes stock based compensation and certain other charges related to acquisitions in the aggregate of approximately $40,000,000 Depreciation and amortization are expected to be in the range of $57,000,000 to 50 $1,000,000 to 50 Okay. Your first question comes from Vivek Arya. Thanks for taking my question. I was wondering last year you had 2 very good quarters with Tegra in July October to be followed by a quarter of some inventory adjustment. Are conditions different this year? Should we expect it to play out similarly this year? Well, we wouldn't have guided what we guided if we didn't have faith and confidence in the TEGRA growth. The difference, I guess, maybe more important to talk about is this year I think that it is relatively clear that the Android tablet, particularly Nexus 7, the transformers from ASUS, they're doing really well. And the reason for that is because it has taken us some time to get the costs, the functionality and the quality of the experience really, really good. You now know that there are 100 of millions of Android phones around the world. And whereas the first tablets when they first came out was introduced with the Honeycomb operating system. The Honeycomb operating system was very different from the Android phone operating system at the time. But now with Jellybean and Ice Cream Sandwich, the applications and the investments that you make in your Android phone, all of those applications just magically show up on your Android tablet. And so this Android tablet a really wonderful higher resolution and larger format display for you to enjoy your content when you're not running around, when you're sitting at home. And so if you haven't had a chance to try the Nexus 7, I really urge you to. It's the first thing I use in the morning. It's the last thing I use at night. And it's really wonderful that all of the applications and all of my content stay synchronized between my 1x phone and a Nexus 7 tablet. And so I think that the momentum of the products that we have are much stronger. Our position in the market is much stronger. And we'll see how these devices do in the marketplace. But at the moment, we're quite confident in their position in the market. Thanks, Danson. And just for my follow-up, the Professional Solutions business, how much of it is macro? How much of it is Romli delay? How much are product specific issues? When should we expect that to pick up? Thank you. Well, Quadro and Tesla are unique in the marketplace and we've gained share of anything. So the market position of Quadro and Tesla are very good. Their value proposition are very unique and the people that buy Quadro and Tesla buy because they need it. It's not a discretionary expense. They need those products. During times when the economy is a little slower and right now as you know, the economy is rather slow in Europe and in China. That affects people's enterprise consumption. So that's a factor. The other factor is the Runley platform launch. It's a very important platform and started out in servers and it's in the process of moving into workstations. And I've got a lot of confidence in Intel's execution. They will ramp up those workstation platforms and the OEMs are all fully charged up to ramp up those workstation platforms. And then on top of that, we have the Kepler GPUs that are flowing into Quadro and flowing into Tesla. And so I think the trajectory is good and I think things will work itself out. Great. Thank you. Your next question comes from Patrick Wang. Great. Thanks for taking. First question, I want to ask about GPU. You talked about being in a still being in a supply challenged environment. I'm just curious how much business you feel like you might have left on the table? And separately, if you could talk about the trajectory of your 20 nanometer supply and whether or not you feel like your shortages are going to subside this quarter? We have no idea how much business we left on the table. And we expect to be supply constrained throughout the quarter. We've taken the supply constraints in consideration for our our we'll have some upside. And I know that TSMC is working as hard as they can for us. And so we'll report on what we learned at the end of the quarter. Thank you. Great. Thanks. And just as a quick follow-up, I wanted to ask about your plans on having an integrated solution. I think that some of your other competitors out there are ramping are trying to ramp at least an integrated processor baseband solution. What are your plans there? Are you guys still on track to really introduce your I guess code name Gray sometime in the next couple of quarters here? Well, there's only one integrated LTE solution in the world today. And I think it's pretty clear that going forward in order to build a world class phone and a top tier phone, you need to have a world class application processor, which includes great CPU and great GPUs. And you need to have a world class software stack. These phones are increasingly becoming computers. It's not just a telephone anymore. And so having a software stack that allows you to concurrently use all of the wonderful things that we've come to know our phone and more is really, really hard to do. And there are very few companies that provide that today. And the 3rd, of course, is a state of the art modem and baseband. And that is exactly the reason why we bought a company called Icera. And our intention is to integrate those 3 major pieces to provide a really great platform for our customers. We haven't announced when grade is going to be available in the marketplace, but we're working as hard as we can for it. And when we do introduce it, it would as you'd expect and as the reason why you're asking expand our market position and guidance for the Q3 here. Can you help us understand which parts of your business may be growing above or below that 15% sequential rate that you provided? That's it for me. Thanks so much. Yes. First of all, thank you. The GPU business is growing. GeForce is growing faster than the sequential rate. Tegra is growing much faster than the sequential rate. And the reason those 2, you could probably guess is because Quadro is not growing as fast as the sequential rate. Okay. Thank you. Thanks so much. Your next question comes from Glenn Young. Thanks for letting me ask a question. I wanted to ask a little bit about China. When you guys initially discussed Tech with 3 wins, you'd mentioned that China was a big component of that. And wanted to just get a sense from you, how you think that business will ramp? Is it white box or branded names? And what kind of ASPs of phones will you be selling into? Yes. We're just now ramping into the China what we call the affordable Superphone segment. Basically, all of the capabilities of today's Superphone, but really engineered for affordability. And And Tegra3 has such a great reputation. The software stack is really exquisite. And so we're quite excited about it. There are many phones being created right now. A couple of them have been announced and we're expecting them to ramp shortly. We still expect trend to be a big market opportunity for us. And if you look at the overall market, the U. S. Is very LTE centric. Korea is very LTE centric. It's very important to have LTE. And we don't have a very good position there until our I500 stand alone and when our integrated solution goes into production. Until then, our target is really focused on the superphone and the premium phones in the non LTE parts of the marketplace. And that would be Europe, that would be Asia and China. And so we still expect those to be really terrific markets for us. Jensen, just a follow-up there. When you are creating an affordable superphone, obviously, there's a price implication on the BOM. How much of a role do you play in that versus other components in the phone that where they can make different choices? We're relatively small component overall for these phones. And so it's not a factor yet. Okay. And then one last quick question on the non Apple tablet market. You alluded to the idea that you do see momentum there and it sounds like that momentum is better than last year. I guess really just trying to get a sense of your confidence level there. How much bigger perhaps you think the opportunity is, not necessarily for you, but for the market, the non Apple market this year versus last year? Well, I think we found the position. I mean, for every product, if you want to be like another product in something like iPad, it's not particularly a smart strategy. But the Nexus 7's value proposition is not to be a cheaper iPad. It's to be a peripheral or a companion device for someone who's really invested in the Android operating system. And the Nexus 7 finally from a tablet perspective made it really, really easy for you to enjoy and to synchronize all of your content that you've already invested in for your Android phone to just magically show up on your 7 device. It tells just picks up where I left off when I'm reading a book. All of my music is there. All my books are there, all the readers are there. It's just the same email, it's just fantastic. And so when I'm traveling, when I'm running around during the day, I use my 1X and when I get home, I turn on my Nexus and I just pick up where I left off. And so I think that the value proposition is just much more clear now. And the build quality is fantastic. Asus did a fantastic job. Google did a fantastic job with Jollibee. Google Play is really easy to use. Magazines are there. Books are there. Movies are there. And so I think it's taken this long to really build a platform that adds value to Android users. And so that's the value proposition. It's not an alternative to an iPad. It's really a device that enhances the user experience for someone who is an Android user. And there happens to be 100 of millions of Android users. And so I think this is I think the niche has really well met and I think they've done a really good job. That's a good answer. Thanks for that, Jensen. Yes. Thanks, I appreciate all of the questions. But just to make sure that we give everybody an opportunity to ask a question, I'd just like to ask us. Let's keep it to one question with one follow on. Your next question comes from James Schneider with Goldman Sachs. Good afternoon. Thanks for taking my question and congratulations on the strong results. I was wondering if you could quantify for us in the quarter in Q2, how much was the increase in desktop versus notebook in the quarter? And then do you expect desktop or notebook to be up more for Q3? Desktop and notebook were both up strongly in Q2 and we expect both of them to yet again be up strongly in Q3. In the case of notebook GPUs, we're ramping you probably know that Ivy Bridge ramp was delayed because market Bridge is the best we've ever had. And the reason why it's the best we've ever had is because the Kepler GPU is really the best GPU we've ever created and its energy efficiency is just so fantastic that the market demand for it is really strong. So we expect to gain share and we expect to ramp up Ivy Bridge in Q3. In the case of desktop, there are several factors working in our favor. One is the PC gaming marketplace is just really, really strong. PC gaming is a vibrant segment. All the game developers are talking about it. It's a platform where free to play has become very important. And whether here in the United States or China or Europe, we're seeing strength in PC gaming. And we're about to introduce and we just started ramping into it, our Kepler GPU that is targeted squarely at the gamers. And this is the segment is starts out at about $99 and goes all the way up to about $2.49 And those segments, we haven't been able to address until now and we've not been able to address it because we just haven't had enough supply. And now that the supply is starting to catch up and gives us enough supply to launch into that segment. And that segment is just dying for Kepler. And finally, we're able to bring Kepler to them. And then lastly, Q2 was quite a shock in the system. We had or Q1 was quite a shock in the system. We had a sort of the convergence of a couple of issues. One of them was the shortage of 28 nanometer supply. And that was very surprising to us and to a lot of people. And the second issue was the flood in Thailand that raised the cost of disk drives, which affects the desktop market as you know. And both of those issues are working themselves out. And so we got a lot of positive momentum driving the desktop market and the market is really, really strong and we're feeling a lot of positive momentum right now. Great. And then as a follow-up, obviously, the TEGRA business is very, very strong as you mentioned. Could you maybe share with us your any updated expectations in terms of TEGRA revenue for the year? I think you previously guided to 540. Is it safe to say you'll exceed that this year? We're comfortable with that this year. Great. Thanks very much. Yes. Thank you very much. Your next question comes from Raj Seth with Cowen and Company. Hi, thank you. Jim, in the context of the prior question about modem integration, etcetera, downstream, wondering about your view on connectivity technologies, Bluetooth, Wi Fi, etcetera. How important do you think that is important for you over time to own those technologies? Thanks. Well, integration is always a good thing. If you look at connectivity, a multifunction connectivity chip goes for something along the lines of about $3 to $4 But an LTE modem is 20 dollars to $25 And so the important thing is to focus on the important thing first. And so we've taken off a big bite and we're working on LTE integration. And so I'm quite excited about the integrated version. There are very few companies in the world that has the ability to build an integrated platform based on a world class application processor, a world class software stack and a world class modem. And that's there are 3 things that are very, very hard to do. And I think we're one of those companies that can pull it together. And when we get that done, we'll think about other things. But those are really by far, by far way, way, way more important than everything else. Yes, thanks. As a quick follow-up, could you comment on attach rates, if you've seen any material shift there kind of what the trend line on attach rates is, notwithstanding the share gains you're seeing on Sandy Bridge, of course? We see no change in attach rate. Great. Thank you. Yes. Thank you. Your next question comes from Sean Webster with Macquarie. Great. Thanks. Good job all across the board there guys. On the graphics side, I was wondering you mentioned that you had a mix shift that helped you in the quarter relative to your 15% sequential increase in GPUs, I was wondering if you could add some color on what units did versus pricing sequentially? Units were up and pricing was probably up too. And the reason why we know that is because we experienced very strong growth in the enthusiast and the performance segment. Yet in the entry segment, disk drive shortage and disk drive prices are although it's getting better, the mainstream part of the marketplace is still slower than usual. That part of the marketplace is picking up. But in Q2, the strength was mostly in the in the performance and the enthusiast side. We just couldn't build enough. So was the pricing up more than the units in Q2? I think units and pricing were both up, but I would think that pricing is up more. Okay. And then just as a quick follow-up to some of the supply constraints on 28. Do you have any view on when that's going to normalize in terms of getting the 28 back on track and being able to have normal lead times? We are expecting to be supply constrained throughout this quarter and then we'll report on that in Q4. But obviously, it's a combination of allocation, yield and the market demand. And so those are a lot of variables. So far, market demand seems very strong and we're selling into a marketplace with quite a bit of pent up demand for Kepler. Yields are improving and we like them to improve even faster because when you improve yield faster with our wafer by business model that we talked about some 3 quarters ago, your units grow and your margins grow. And so we really need TSMC and they're working really, really hard to improve yield, because it's good for everybody. And so we need them to really focus on that. Thank you. Thanks a lot. Your next question comes from Hans Moses Mann with Raymond James. Thanks. Congratulations guys. Terms of the ramp in the second half. Can you give us a sense of the possible split between Android related platforms and RT for TEGRA? Thanks. Well, it's a little early for us to talk about Windows RT. I think all of the Windows RT questions really ought to be targeted at Microsoft right now, because they haven't even really launched it. But the ramp is how about this? The ramp that you're having, I'm assuming you're having some kind of ramp into those platforms as we speak. Is that as expected? Is it better than expected? Or any flavor there that would be helpful. Thanks. Well, what I can say about surface RT is that we were all including all of you really blown away by the announcement of Surface RT. I think that they've done an amazing job and it's a really, really cool device. And so I can't say that I saw that coming. I was very positively surprised and I think so is everybody else. Very well. Thanks. Yeah. Thanks a lot Hans. Your next question comes from Kevin Cassidy with Stifel Nicolaus. Thanks and congratulations on the quarter. Can you give us an update on your virtualization efforts both the VGX and the grid? We are working very, very closely with our partners. The VGX is targeted at enterprise. Our partners there would include the virtualization companies Citrix, VMware and Microsoft. The OEMs that we would be working with are the best OEMs in the world in the enterprise space. And we announced integrating software, building servers and integrating software, building servers and introducing them to customers and so on. On the grid side, that's targeted at gamers. And cloud gaming is really quite the buzz. 1 of our partners was bought by Sony recently. Gaikai has been a long time partner of ours and a development partner on Grid. And they were bought by Sony recently. So that's really exciting. Now they have quite large financial backing and of course a rich library of content to bring to them. And so we're working with the service providers on that side. We don't have any more to announce at the moment, but we're very busy working on it. Okay. And you had mentioned that you expected some growth in that product group in the next quarter. Is that part of it? Or is that just going to be the HPC segment? Or will it be the virtualization segment also? Do you expect revenue that quickly? I think that we will see some shipments this year. But I would expect that most of these servers will go to market and ramp next year in Q1 of next year. We have plenty to ship this year and I've got I could use all the supplies for everything else. And so we have plenty to do already. Okay, great. Thank you. Your next question comes from Vijay Rakesh with Sternaghi. Yes. Hi, guys. Good quarter here. Just wondering on the Tegra 3, what's your split between tablets and handsets? And I think I might have missed this, but did you guys say you're going to be baseband on the road here? Thank you, Vijay. Our split on TEGRA for tablets versus phones is more tablets than phones. And my sense is that it's going to stay that way. And the reason for that is because I really think that the market has held nice positions for alternative tablets, nice positions with really great value proposition, a really good reason to buy it and really affordable and really exquisitely made. And so I think we're finally seeing the convergence of all of these wonderful things in non iPad tablets. And so we're delighted by the early success and the demand out in the marketplace for the tablets that we're in. So I think tablets is likely to be a strong growth opportunity for us as we had hoped and as we had worked on. A lot of people think that the tablet market in just a few more years will be as large as the entire PC mobile market. And based on the we use our tablet today, I really wouldn't be surprised by that. And so if we can protect and even grow from our current position of tablets, I think this is going to be a very, very large part of our overall Your next question comes from Chris Caso with Susquehanna Financial. Thank you. I wonder if you could talk a bit about seasonality for the January quarter. And obviously, I know you don't want to give guidance now, but given that there's a lot of sort of atypical things see as typically seasonal patterns into the January quarter? You're absolutely right. It's too early to comment on January. And there's we have so many new things to introduce. I think there's seasonality, there's market share, there's supply and there's new products. And so that's enough variables, enough elements to consider for when we get there. But I'm hoping that supply would be even more improved. I'm hoping that yield would be much more improved. I'm hoping that the market is reasonably robust, but mostly I'm excited about the new products that we're going to ship. Okay, great. And as a follow-up, given what you said about 28 nanometer supply improving further and the yields improving further, how should we think of that with respect to gross margins? Is there still some increase available on the gross margin line as a result of those elements? Yes. Back in the good old days, this is 3 quarters ago, when we started going into wafer buying, our margins are now very, very affected by to improve yields, it should be all hands on deck. And there's just a lot more room to improve 28 nanometer yield to the 40 nanometer level. And so what that says is that as we ramp further and further into 28 nanometer and as we improve yield, it should improve our margins. And the leverage as you can tell would be quite significant. And so it should we should be all hands on deck to improve yield. TSMC is already all hands on deck to improve yield. Nothing could be a greater lever for their ability to increase supply for all of their customers. Great. Thank you. So everybody's interest are all perfectly aligned. Your next question comes from Joanne Fink with Longbow Research. Thanks and congrats on a real nice quarter guys. Thank you, Joanne. Yes, a question for you. Really, Jensen, just about your vision of these Android tablets, I understand the easing of barriers to adoption with the similarity of phones. But one thing we're seeing with iPads is a lot of adoption in businesses, particularly services businesses. So perhaps you could give us a sense of whether you think these Android tablets are likely to remain consumer devices and what proportion you guys are modeling at least for the maybe percentage of users that might want to add a tablet in addition to their Android phone. So what are you thinking about in terms of your market opportunity? Well, I think it's taken us a year and a half to really even build something that appears the market really loves. And we've taken during this year and a half, we've worked on some, gosh, 60 tablets, maybe more. And we just we didn't give up on it and because we believe in the future. And I think that people recognize now that we have a lot of expertise in building these and the tablets that we've built are really, really delightful. And so I'm really excited about the fact that the positioning of Android tablets is now finally resonating with the marketplace. If you have an Android phone, you got to go get yourself an Android tablet, because all of your content just shows up. And I think if if we use that as a if we extrapolate it from that, surely it's going to be a very large market. And but we're just going to have to wait and see how it evolves. But I've got a lot of confidence in the ecosystem and ourselves ability to build even greater tablets based around Android. And you can just imagine all the things that people are now doing as they hit this tablet. It's just going to be really wonderful. I think the positioning of Android tablets is spot on. Now in terms of enterprise, there's a a users. I don't use my tablet at the office because there's just too many incompatibilities. And for me, it's important for me to be able to see every number on the spreadsheet. Just several of the numbers on the spreadsheet is not enough for me. And so I need to see all the numbers and need to see all the graphs. I need to see all the charts. It's too important to me. And there's just no reason for me to make that compromise. And there's a couple of ways to provide that. One is obviously office. And then the other is to virtualize it, which is the way Citrix does it. And Citrix and VMware and RemoteFX makes it possible for us to remote the entire PC experience to any device. And that's the reason why we created DGX. And I'm very excited about the work that we're doing there. And it has a real potential of freeing up all of our employees, so that they can use whatever device they like and still be able to get 100% compatibility. So there's a couple of ways to do that, putting Office on the tablet, the pure Office version and then putting the PC in the server and remote and virtualize it. Okay. Thanks for that. And then could you perhaps give us some thoughts about your operating expenses? They've remained rather elevated. This is an investment stage in the new business, so that's understandable. But is this something where you feel like you need to hang on to this level of costs and you just hope to grow into these operating expenses? Or do you envision maybe coming to a point where you've made the investments so R and D expenses will eventually fall? Nothing would give me more joy than for us to be able to invest even more. We have more ideas than we can invest in right now and we're trying to invest as thoughtfully and as in a measured way. But as you mentioned, we're in the process of reinventing our company. We're the only computer technology company that has made its way from the PC industry to the mobile industry. And now we have a real position in the mobile space, whereas there were just 1 year ago, I think there was an analyst report that showed some 48 application processor companies in the world and we weren't even on it. And now we're probably number 2. And so I think we're making real good progress in making our way into the fastest growing segment of the computer industry. And I think as a computer technology company, I can't imagine why I can't imagine how long term you could have a sustainable advantage if you're not 1 foot in the computer industry and 1 foot in the mobile computer industry. They're too important not to be in these two segments. And so we're we made some investments. We're making investments to reinvent ourselves. And I think the reinvention is really paying off. So it sounds like we should expect you to grow into those operating expenses over some time? Yes. We hope to grow our top line. I think Q2 was a good start. Q3, we've guided to another quarter of growth and we'll take it from there. Any hint you'd like to give us on where you might find your OpEx percentage say 4 or 6 quarters from now? I have no idea. Okay. Thanks. Thank you. Your next question comes from Arnab Chanda with Avanion. Thanks. Gentlemen, just a couple of quick questions. First, historically, I think I remember your professional business is actually significantly higher margin than the other two businesses. Now you're getting mix moving towards your GPUs and you're still actually improving gross margins. Could you talk about that? Is that because of the new business model with TSMC? Is that because your cost structure is much better? If you could talk a little bit about that? Thank you. Well, Kepler is a real margin driver. And so when we ship enthusiasts, when we ship performance, those are all margin drivers. But you're right that Quadro and Tesla were both down and they both have the highest margins and also because they're the highest value in the most software intensive parts of our business. They have much higher margins and they were both down. And so the other businesses made up for their margins and more. But it's the current business model at a I prefer a die buy to tell you the truth. And it's just because it's simpler for us and it's more predictable for us. But now that we're in the wafer by model, we just have to put a lot more intensity into yield improvement. And yield was better in Q2 than it was in Q1. We're expecting it to be better in Q3. And so we just we really have to drive the living tar out of it and be all hands on deck. It is a very, very important earnings driver for us. And we're still far away from where we need to be. And where we were before was higher than this. And so 28 nanometer is still overall still dragging our gross margins as a company, but we need to we have our sights on much higher margins than this. Great. And then I guess, TEGRA business, obviously, 1 year made a huge difference. Clearly, it seems like now at least people will agree they're in the market for Android tablets. Could you talk about, you said phone versus tablet, you're focusing more on tablets or you think that's where the growth comes from. To the extent you can give us some qualitative idea what Windows 8 or Windows RT, I guess I should say. Are you talking about multiple design wins? Is it a significant contributor for Q3? And how do you see that sort of progressing? We'd really appreciate that. Thank you. We have 3 design wins on Windows RT. And I think Microsoft announced their well, Microsoft announced theirs, Asus announced theirs and I don't think the third has been announced yet, so I won't announce it for them. In the near term, tablets will be an important driver for us. And the reason for that is because our segment of the phone marketplace is mostly focused on super phones and the performance phones. In order for us to grow much, much more, we have to integrate a very important piece called the LTE modem. And so we have to integrate that and that's the reason why we bought Acera. And when we do that, when we achieve that, our market opportunity grows substantially. It's many times larger than the current phone segments that we target. And so I think that in the next several quarters, our primary focus is going to be continued smartphones, our super phones and premium phones and then of course ramping all of these tablets that we've been designed into. Thanks, Jim. It seems like your years of investment is finally playing off. Thank you very much, Arnaud. Your next question comes from Craig Berger with FBR Capital Markets. Hey, guys. Thanks for taking my question. Nice job on the quarter. I know you guys earlier in the year talked about 30 handsets on Tegra. Do you have any update for us there? How many of those handsets are now out in the market? How many might still be coming in the second half? There are many that have already come out from HTC, the European models, the Chinese models, the Asian models, the U. S. Model is coming out soon, I think. There's the LG phones, the Fujitsu phones. And now we're in the process of ramping the phones that are indigenous to the Chinese market. We've ramped the ZTE phone. That's also a global phone. And we're in the process of now ramping the super phones in the Chinese market. And so but as you know, the real focus is to make sure that we build these phones as wonderfully as we can. I'm just incredibly proud of the work that we did with HTC on the 1X. It's just an exquisite phone. And so we just made if we made a whole bunch more like that, I think we're going to be in good shape. Great. And then the follow-up question is on the professional side of the business. How do we think about Quadro going forward? And can you also give us any update on your enterprise Tesla operations? Thanks. Quadro's position is better than ever. Our market share and our market position is the highest it's ever been. The technologies and the capabilities we're bringing to that marketplace, we were just at SIGGRAPH this week and you might have seen some of the announcements. The work that we're doing around Quadro Plus Tesla to accelerate the design workflow is really revolutionary. And people are just so excited about it, because I was just here reading a report today about one particular company that took a month and a half to create a particular shot and is now able to do it literally in 2 days. So whether it's rendering or video simulation in creating those shots and most shots today have so much computer graphics in it And advertising and HD advertising is a very big part of the work that we do with Quadro. It's really revolutionized how people produce videos. And so the work that we're doing there is better than ever. And I have every confidence that as soon as the economy gets better or even if it doesn't get better, eventually people will have to upgrade their workstations because it's at the core of the work that they do. It's the creative part of their company. And so irrespective of the economy at some point that people have to come back and buy new workstations. I think part of it is people waiting for Ramly to launch. They're ramping up into workstation space. And I think that the ramp it's just now ramping up. So I'm very confident that once those things get settled down, the enterprise customers will come back and buy again. And gents on one more. You guys have a lot of cash. Do you have any plans for that cash? The only plans that we have to announce right now is to make a lot more cash. Very nice. Thank you. Thanks a lot. Your next question comes from Rajeev Gill with Needham and Company. Yes. Thanks and congrats as well. On the TEGRA business, it seems that most of the growth that occurred in the Q2 was coming from the tablet bills and it appears that that's going to continue into the Q3 as well. I'm wondering if you can give me any insight in terms of sell in versus kind of sell through, Any sell through rates you can talk about? Look, see the first we need to have different work tablets go to production. And so I don't know that I have much more insight than that. And we'll come back and report it as soon as we can. I think the high level is just the market reception of these tablets have been better than any tablets. So, we want to search for the perception And just last question. On the graphics card side, that business is growing well in light of a very tough PC environment and you expect that to grow in the Q3. So are you going to are you seeing kind of a resurgence in PC demand given the Ivy Bridge ramps corresponding with the Ultrabook Windows 8? Or is it primarily market share gains, new product customers? Can you elaborate a little bit further on that? Hey, Raji. Could you please mute your phone? We're getting a lot of noise. Thanks. Thank you, Ranje. A couple of growth drivers for us in GPUs. One of them, of course, is the notebook design wins on Ivy Bridge. And Ivy Bridge was going to ramp in Q2 and it ended up ramping in Q3. And so that's one growth driver. Our market share is going to be higher. The attach rate is stable. And Kepler is just a really wonderful GPU for notebooks because it's so energy efficient. The other growth driver is desktop. We're not seeing anything different than other people from a demand perspective, But it's important to realize that desktop for us is not the same as OEM desktop. The vast majority of our GPUs for desktops are sold to gamers. There are hard to say exactly how many hardcore gamers are around the world, but it's many, many tens of people estimate that somewhere around 50,000,000 to 100,000,000 core gamers around the world. And they upgrade their GPUs every couple of years. And I think that Kepler is the best GPU we've ever built. It's the best GPU the industry has ever built and it's the best GPU in the industry today. And so everybody has been anticipating the Kepler GPU for the gamer segment. And we haven't been able to ramp into it because the demand or because the supply just didn't allow us to do it until now. And so we're going to be quite enthusiastic ramping Kepler into the gamer market and the reception has just been fantastic. Operator, I think we have time for one more question. Yes, sir. Your final question is going to come from Suji Desilva with ThinkEquity. Hi, guys. Nice job on the quarter and the guidance. Just to follow-up on that last question, with the constraints on 28 nanometer, is that impacting more of the OEMs or the channel you just talked about Jensen? If it is the channel, is there a potential there's pent up demand as that becomes available? For desktop GPUs, our actually very small and it's consistent with anybody's observations. I mean, we don't buy desktop PCs very much from Tier 1 OEMs anymore. It's mostly and yet the desktop PC market is really quite vibrant. And the reason for that is because gamers build their own PCs. And there are tens of millions of gamers all over the world. And so I think one that the market is very different than people expect. 2, what drives the gamers are 2 things. 1, great games and there are just some wonderful games coming out now. And PC gaming is really surging. It's from a technological perspective, from a gameplay and interest perspective, it's surging past game consoles. And then secondarily, the Kepler GPU is just so fantastic. It's the best GPU we've ever built. And compared to what the current installed base is, it is so far superior that I think gamers have been climbing for it. And yet until now, the most affordable Kepler about $400 It's only been available for enthusiasts and scientists. And finally, we've been able to bring that bring the price down to the level of a gamer PC gamer and a volume that allows us to support the ramp. Okay. And then on share on the notebooks on Ivy Bridge, in the past you've peaked around 65%, seven percent. Do you think you can go above that with the Kepler product given the competitive landscape at this point? I'm not really sure. Give me a chance to see how it turns out and then we'll come back and report it. Okay, great. Thanks guys. Yes. Thank you very much. Okay. Thank you everyone. That will do it for today. We look forward to talking to you about our Q3 results. Thank you.